Shrugging Off Rising Rates

Dividend Stocks

Shrugging Off Rising Rates

The performance of many dividend stocks during past periods of rising rates may surprise you.

At first blush, dividend-paying stocks would appear susceptible to losses as yields on competing income sources rise. These stocks do tend to decline in the early stages of a period of rising rates as investors weigh the length and severity of rate tightening. Yet a study of high dividend stocks by Morgan Stanley Capital International (MSCI) going back to 1927 found that in markets where the fed funds rate is below 3% at the start of a rate tightening cycle, these stocks outperformed the market by an average of 2.4% per year. The impact of higher rates may be tempered by two other factors: the low absolute rate environment that we have experienced since the global financial crisis and a general overweight to bonds.

Longer term, not all dividend stocks will be impacted equally by higher rates. Stocks that pay a static dividend have fared worse in past tightening cycles than companies that consistently grow their dividends. Meanwhile, stocks of companies forced to cut their dividends have underperformed stocks that pay no dividend.

One potential way to cushion this rate impact is by targeting companies with a track record of dividend increases and the combination of financial strength and growth which should enable them to continue raising their dividend payments. These companies typically feature healthy balance sheets and consistent cash flows that provide plenty of capital to effectively operate their business and fund a growing dividend.

For more insight on how dividend growers can thrive in rising rate environment, read the full report.


IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Outperformance does not imply positive results.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.